After notching its best August in nearly a decade, Wall Street started the historically bearish month of September on a disappointing note as the Dow tumbled nearly 200 points Tuesday despite new evidence the economy is slowly healing.

Today’s Markets

The Dow Jones Industrial Average lost 185.68 points, or 1.96%, to 9310.60, the Standard & Poor's 500 slid 22.58 points, or 2.21%, to 998.04 and the Nasdaq Composite tumbled 40.17 points, or 2%, to 1968.89. The consumer-friendly FOX 50 dropped 16.73 points, or 2.24%, to 730.12.

The wave of selling on Wall Street was led by the financial sector and came in the face of a pair of better-than-expected economic reports that revealed the sharpest increase in pending home sales since June 2007 and the first expansion in the U.S. manufacturing sector in nearly two years. After initially cheering those reports, the markets headed south and didn’t look back.

“While there is nothing negative about the data, I think it’s more market sentiment driving stocks’ direction,” said Michael James, senior equities trader at Wedbush Morgan Securities. “There are far more people looking to sell stocks than buy stocks, which is a change in sentiment from the last several weeks.”

The bank-led selloff marked the steepest one-day decline for the Dow since Aug. 17 and its first three-day losing streak since June 24. The benchmark index has tumbled 2.82% over that span, its worst stretch since July 7. It's also worth noting the S&P 500 and Nasdaq Composite broke through the psychologically-important levels of 1000 and 2000 respectively. 

Even some bullish analysts had long been calling for a pause or a correction after stocks’ summer surge. They pointed to an economy that is still weak, the longest win streak since 2007 for the Dow and the 3,000-point climb off the March lows.

“It’s not that the market is going back to the March lows but there’s no question it got ahead of itself,” NYSE trader Ted Weisberg of Seaport Securities told FOX Business.

Underscoring that negative sentiment, Wal-Mart (WMT), which is a defensive play, was the only one of 30 blue-chip stocks to close with gains. Financial-related stocks American Express (AXP), Bank of America (BAC) and General Electric (GE) took the brunt of the damage.

A plunge in Chinese shares continued to weigh on Wall Street a day after the Shanghai Composite capped off its worst monthly decline in 15 years.

“As the China market has come unglued a little bit, that’s placed a concern about our market valuations -- justified or not,” said James.

Financial stocks sank 5.4% as traders unloaded shares of many of the banks they spent all summer buying. Some of the sector's weakest performers were the ones that have run up the most over the past few months, including bailed-out insurer American International Group (AIG), former Dow member Citigroup (C) and commercial lender CIT Group (CIT). 

Markets Shrug Off Positive Data

In one of the clearest signs yet of a healing economy, the Institute for Supply Management said its manufacturing index soared to a 52.9 reading in August, up from 48.9 the month before. It was the first above-50 reading, which signals expansion, since January 2008, the month after the current downturn began. Conglomerates like 3M (MMM) and General Electric (GE) initially rallied on the news but ended sharply lower. 

On the housing front, the National Association of Realtors’ pending home sales index rose 3.2% in July -- more than double what analysts had expected. The increase marks the sixth consecutive rise for this forward-looking indicator of the housing market and the fastest sales pace since June 2007. The news initially buoyed home builder stocks like Lennar (LEN) and Pulte Homes (PHM) but those gains proved fleeting.

Wall Street also shrugged off the "best" monthly auto sales figures of the year, which were due in part to the government's "Cash for Clunkers" program. Ford Motor (F) saw its shares tumble nearly 5% despite reporting a 17% jump in August sales. 

Seasonal factors are also dragging on the markets. While the blue chips climbed 3.5% last month -- their best August since 2000 -- the S&P 500 has made headway in September just 43% of the time since 1950, according to Miller Tabak’s Dan Greenhaus.

“There is clearly something to the seasonal weakness and with a 50% rally in the books for equities, September is clearly worrying some,” Greenhaus wrote in a note.

The commodity markets weren't spared from the selling as crude oil settled at its lowest level since Aug. 17. Crude closed at  $68.05 a barrel, down $1.91, or 2.73%. 

More turbulence could be in store for the markets later this week as traders brace for retailers’ same-store sales reports on Thursday and the crucial monthly jobs report on Friday.

“We are experiencing a healthy pullback that could conceivably get us to 950 on the S&P. I know it sounds a little aggressive, but given weakness in Asia, a lack of earnings announcements, the season and a pause in the move higher, I don't think it is out of the question,” Peter Kenny, managing director at Knight Capital Markets, wrote in a note.  

Corporate Movers

Bank of America (BAC) is in negotiations with the U.S. to repay about $20 billion in exceptional aid the bank received when it nearly backed away from buying Merrill Lynch, The Wall Street Journal reported. The bank is also reportedly in talks to pay up to $500 million to escape a loss-sharing agreement on $118 billion of assets. The talks could result in BofA no longer being subject to oversight from the White House’s “pay czar.”

EBay (EBAY) inked a $1.9 billion deal to sell a 65% stake in online calling service Skype to a group of private investors, led by private equity firm Silver Lake Partners, venture capital firm Andreessen Horowitz and British venture capital firm Index Ventures. The deal, which values Skype at $2.75 billion, is expected to close in the fourth quarter of 2009 and comes after Google (GOOG) reportedly passed on buying the service. 

CIT Group (CIT) fell sharply after the struggling commercial lender said in a regulatory filing it won’t be able to make a Sept. 15 interest payment on its debt due in 2067. CIT said that it must “use commercially reasonable efforts” to execute an alternative way of paying the bond payment, and if the company cannot handle the alternative, it must “mandatorily defer interest on the notes.”

Acadia (ACAD) lost two-thirds of its market value after the drug maker and its partner Biovail (BVF) said their Parkinson’s psychosis drug failed to meet its primary goal. The drug, pimavanserin, missed the primary endpoint of antipsychotic efficacy during a Phase III trial but met the key secondary goal of motoric tolerability.

News Corp. (NWS) is considering making its first major investment in the Middle East by taking a 20% stake in Rotana Media from Saudi Prince Alwaleed bin Talal, Dow Jones Newswires reported. News Corp. is the parent of both FOX Business and Dow Jones.

American International Group (AIG) lost another 21% of its quickly-eroding market cap. The bailed-out insurer was downgraded to “underperform” from “market perform” by Sanford Bernstein, which put a $10 price target on AIG. "AIG's current stock price gives virtually no weight to the possibility that the common equity is worth zero," an analyst wrote.

Metabasis Therapeutics (MBRX) said its CEO Mark Erion is leaving the small biotech company at the end of next month to join drug giant Merck (MRK). Metabasis, which recently terminated R&D efforts, said Chairman David Hale has been appointed executive chairman.

Gander Mountain (GMTN) saw its shares plummet 26% after the outdoor-gear provider disclosed a wider-than-expected quarterly loss of 30 cents per share and warned of a challenging retail environment for the rest of the year. Gander, which sells hunting, fishing, camping and other outdoor gear, said is sales slipped 1.8% to $248.4 million.

Data Dump

The Commerce Department said construction spending unexpectedly fell 0.2% in July due to slumping commercial spending. Economists had expected spending would rise 0.2% in July. 

Global Markets

European markets tumbled along with U.S. equities. The U.K.'s FTSE 100 fell 1.82% to 4819.70, France's CAC 40 slipped 1.92% to 3583.44 and Germany's DAX lost 2.51% to 5327.29.

In Asia, Japan's Nikkei 225 rose 0.36% to 10530.06, Hong Kong's Hang Seng gained 0.75% to 19872.30 and China's Shanghai Composite climbed 0.6% to 2683.72.